Banks, financial markets, and social welfare

This paper constructs a general equilibrium model of banking and financial markets. The model allows to compare financial systems in which banks have access to financial markets with financial systems in which banks do not have access to financial markets. Allen and Gale [A welfare comparison of intermediaries and financial markets in Germany and the US. European Economic Review 39 (1995) 179-209] find that the Anglo-Saxon model of financial intermediation in which financial markets play a dominant role does not necessarily improve social welfare in comparison with the German model in which banks dominate. Our model provides a theoretical foundation for this view.